Liberty Coin Service

Broadcast 10/26/2011 on WILS-1320 AM

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Announcer:

Welcome to another edition of Things You “Know” That Just Aren’t So, And Important News You Need To Know presented by Patrick A. Heller, owner of Liberty Coin Service and Premier Coins & Collectibles in Lansing and Delta Township.  Take it away Pat.

Heller:

 Good morning.  Several financial events will come to pass next month of which one or more could trigger great volatility in gold and silver prices.

The Federal Open Market Committee will hold their next meeting November 1 to 2.  For years it has been a common pattern for precious metals prices to drop before these meetings.   Several times this year, the conclusion of this meeting was followed by a spike upward.

The impact of the FOMC meeting will be overshadowed this time by the G-20 Group of Nations meeting coming up in Cannes, France November 3-4.  This is the meeting at which German Chancellor Merkel and French President Sarkozy promised that they would unveil their comprehensive plan to solve widespread financial problems affecting the 17 nations that use the Euro.

If a genuine detailed resolution is proposed at this meeting, look for global financial markets to respond positively to the news.  Unfortunately, in my mind, there is no chance that this meeting will have a happy ending.

I think it is most likely that no allegedly comprehensive solution will be proposed because the parties are too far apart.  There might be an announcement of some partial agreement.  Don’t be surprised if the politicians try to pass this off as being comprehensive.  I can easily see Eurozone governments promising that they have already come to an agreement on areas where there is no consensus, but masking the divide by trying to portray them as “details.”

This fake claim of a comprehensive solution is not likely to fool people.  It will quickly be obvious that there is no decision on whether governments (meaning taxpayers), banks, or investors end up absorbing the hundreds of billions of dollars in bad debt losses.  At the same time, investors will assume the worst and further trash the values of European government debt and the stock values of major European and US banks.  This development could trigger a global financial crisis on a scale never before seen.  Gold and silver prices could soar.

While the G-20 meeting is wrapping up on November 4, the US Bureau of Labor Statistics will release its monthly jobs and unemployment report.  Over the past five years, gold and silver prices have been pushed down more than 90% of the time in advance of the release of this data, with prices recovering afterwards.  I have heard that the jobs and unemployment report this time around could be one of the most positive in the past few years.  Unfortunately, even if this news is good, I don’t think it will be enough to offset the horrible backlash to the G-20 meeting.

Should worldwide financial markets hold together through next week’s developments, the next key date to watch is November 22, when COMEX December 2011 gold and silver options expire.  If precious metals prices are high on the expiration date, that would encourage more investors to exercise their call options to demand delivery of the physical metals, leading to an even tighter supply squeeze than the market it now experiencing.  Normally, the volume of December contracts is larger than for those of other calendar months, so the US government has a strong incentive to suppress gold and silver prices on November 22.  The lower the spot prices, the fewer call options that would be “in the money” and be worth exercising.

There have been tricks played in the past to reduce the impact of the options expiration, the most common and consistent being the manipulation downward of gold and silver prices.  I wouldn’t be surprised to see this scenario again.

The first day of notice for the COMEX December 2011 gold and silver futures contracts is November 30.  Most COMEX futures contracts are never intended for physical delivery.  Owners of long or short contracts usually sell or offset positions ahead of maturity.  

In theory, long contracts still owned on the first day of notice are standing for delivery of the physical commodity.

If stood for delivery, short sellers have an incentive to make prompt delivery because that minimizes their storage and insurance charges.  If there are too many “naked” short sellers, meaning those who do not possess the underlying physical commodity, a major scramble to find physical metal could ensue.  This occurred in March 1998 when Warren Buffet’s Berkshire Hathaway stood for delivery of its entire 129.7 million ounce silver purchase, where the price of silver rose more than 25% in one month.  There was a mini-jump in the price of silver with the maturity of the March 2011 contracts.  If a shortage of COMEX bonded warehouse gold or silver develops with the maturity of the December 2011 contracts, prices could rise once again.

At the minimum, I would expect gold and silver prices to be volatile during November.  It is entirely possible that prices at the end of the month could be much higher than they are today.

That’s it for now.  Tune in again next week for more “Things you ‘know’ that just aren’t so, and important news you need to know.”  I’m Patrick A. Heller, owner of Liberty Coin Service in Lansing and Premier Coins & Collectibles in Delta Township.  Thank you for listening.